City Journal Autumn 2014

Current Issue:

Autumn 2014
Table of Contents
Subscribe
Tablet Editions
Click to visit City Journal California

California

Mark P. Mills
Washington Targets Cupertino
Silicon Valley should get ready for a regulatory onslaught.
9 May 2014

Silicon Valley innovators love to talk about “disruptive innovation,” the iconic phrase coined by Harvard’s Clayton Christensen. But today, the innovators’ dilemma—to borrow from Christensen again—is how best to confront disruptive regulation from Washington, D.C.

The Obama administration last week released a long-anticipated policy paper with an innocuous title: “Big Data: Seizing Opportunities, Preserving Values.” Valley executives, venture capitalists, and entrepreneurs should read it for insight into why and how big government plans to engage the once-dynamic and lightly regulated high-tech industry. “It is the responsibility of government,” the report declares, “to ensure that transformative technologies are used fairly and employed in all areas where they can achieve public good.” That statement is a portent for increasing collisions between West Coast entrepreneurs and East Coast regulators.

Even after Edward Snowden’s leaks of National Security Agency activities, the Obama administration seems less worried about its own spying than about the private sector’s use of private data. Silicon Valley’s hiring practices have also come under scrutiny—in particular, the lack of women and ethnic minorities in leadership positions. And tech’s image took a beating over the news about the collusion among major companies such as Apple, Intel, Google, Adobe, Intuit, Pixar, and Lucasfilm to squelch employee mobility and keep salaries in check. Lawmakers are also concerned about outsourcing to China and other nations with substandard labor or environmental practices.

Silicon Valley innovators are rolling out Web-based alternatives to brick-and-mortar businesses, and regulators—along with the special interests they protect—are responding in kind. Airbnb is fighting a pitched battle with numerous jurisdictions over its consumer-to-consumer alternative to hotel and room rentals. Uber, an innovative car service, faces similar battles with regulators, unions, and tax authorities. The Federal Aviation Administration has grounded drones, and the Department of Transportation put the brakes on self-driving cars.

It was only a matter of time before Silicon Valley became a target of federal oversight. Like moths to a bright light, money attracts Washington’s political and regulatory classes. Tech companies are among the biggest holders—or for some, “hoarders”—of $2 trillion in profits sitting in offshore tax havens. (The United States once had the lowest corporate tax rate in the industrial world; it now has the highest.) Five of the 15 most profitable American companies are in tech. (Finance comprises the second biggest group with four in the top 15.) Information-related industries now account for triple the share of the total U.S. economy compared with, say, transportation-related industries. And at the global level, annual capital spending on information systems rivals annual capital spending on oil and gas infrastructure.

With that in mind, imagine the federal government regulating the Internet like it regulates trucking or yesterday’s broadcast networks. Whether and how to regulate the Internet’s flow of information lies at the center of the debate over “net neutrality.” It’s a quintessential Washington issue: Who pays for what, and how much authority does a business have over its own assets? Google and Netflix are considering a major public-relations campaign to pressure the Federal Communications Commission to keep digital highways “neutral.”

The future of online self-governance, which has fostered Internet freedom, is now up in the air. One European Union telecom representative recently said that the “Internet is now a global resource demanding global governance.” What does that mean, exactly? When the White House announced—and subsequently tabled—an effort to cede control over domain naming and associated oversight to an international body, industry insiders, and many in Congress, were surprised to discover the plan’s legal vagueness.

Silicon Valley should expect broader and deeper scrutiny. Yet the tech industry continues to insist that it’s somehow different. As Google chairman Eric Schmidt said, “we’re making a lot of money . . . but most importantly, we’re making the world a better place.” True, but Schmidt isn’t naïve, either. The Washington Post reported last month that, “Google, once disdainful of lobbying, [is] now a master of Washington influence.” It’s a matter of practical necessity: the business of Google and the entire tech ecosystem intersects increasingly with what government likes to regulate.

With all their focus on controls, risks, and limits, regulators and policymakers have less to say about the industry’s economic benefits or the conveniences, freedoms, and entertainment that billions of people enjoy because of the Internet. Harvard Business Review’s Walter Frick warned recently that “the whole economy will suffer” if “elite opinion-makers” become cynical about Silicon Valley. Thus, tech’s giants are scrambling to respond to issues such as demonstrations in San Francisco against rising rents in working- and middle-class neighborhoods that have garnered national attention, such as a Newsweek story on the tech boom’s “ruthless gentrification.”

But it has always been thus in the history of new technologies and industries. The early days of railroad, the automobile, aviation, telephony, and nuclear energy all saw rapid growth and tumult, new businesses, wild profits, and new millionaires. All were followed, in due course, by increased government scrutiny, oversight, and regulation—and in some cases, suppression. A half-century after Thomas Edison (the Steve Jobs of his day) built the first power plant in lower Manhattan, Congress passed the Public Utilities Holding Companies Act, which essentially took over the electric industry. We are fast approaching a half-century since Steve Jobs founded Apple in 1976.

The 2,854 miles (according to Google Maps) that separate Washington from Cupertino, California, are not enough to stay the government’s heavy hand. Truth is, tech’s gals and guys are capitalists who want to disrupt and dominate. Listen to any venture capitalist’s pitch: VCs aren’t investing in the next Facebook or Amazon so that they can “do no evil,” but so that they can make lots of money and, well, disrupt things. Bureaucrats, by contrast, like to limit, constrain and preserve the status quo.

Every industry has struggled with the conflict between growth and regulation. Yet as one of the tech industry’s top lobbyists rightly observed in a recent speech: “Because the Internet is not regulated as a public utility, it grows and thrives, watered by private capital and a light regulatory touch.” We should keep it that way.

SHARE
respondrespondTEXT SIZE
If you enjoyed
this article,
why not subscribe
to City Journal? subscribe Get the Free App on iTunes Or sign up for free online updates:

View Comments (3)

Add New Comment:

To send your message, please enter the words you see in the distorted image below, in order and separated by a space, and click "Submit." If you cannot read the words below, please click here to receive a new challenge.

Comments will appear online. Please do not submit comments containing advertising or obscene language. Comments containing certain content, such as URLs, may not appear online until they have been reviewed by a moderator.